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The Tax Cut and Jobs Act (TCJA), which the House Ways & Means Committee will consider this week, would generally disallow the state and local tax (SALT) deduction. However, it would allow a deduction for up to $10,000 in state and local property taxes. While the Tax Policy Center has not yet analyzed the TCJA, here are some tables that illustrate the current size of the SALT deduction in each state and show how much of the value of the deduction comes from property, sales, and income taxes.
The TCJA would roughly double the size of the standard deduction and eliminate other itemized deductions such as those for other state and local taxes, medical expenses, and casualty losses. These two changes mean that relatively few households would benefit from claiming the remaining itemized deductions at all (such as for mortgage interest paid or charitable donations), and most remaining itemizers would tend to have high-incomes
Property taxes are an important source of state and local revenue in all states.
Property taxes contributed about 17 percent of state and local general revenue in 2015. The percentage varied across states however, ranging from 7 percent in Alabama to 38 percent in New Hampshire. Most property taxes are collected at the local level by school districts, counties, municipalities, and townships. Local property tax revenue accounted for 97 percent of the $488 billion of combined state and local property tax revenue collected in 2015. Property taxes are an important source of funding for public elementary and secondary schools.
Property tax deductions are less concentrated at the top of the income distribution than income and sales tax deductions.
TPC estimates that 84 percent of the current benefit of the SALT deduction for sales and income taxes goes to taxpayers in the top 20 percent of the income distribution (the top quintile), and 44 percent to taxpayers in the top 1 percent of the income distribution. In comparison, two-thirds of the tax benefits from the property tax deduction goes to the top quintile and 16 percent to the top 1 percent.
The average property tax deduction currently is lower than $10,000 in every state, but the cap would bind for high-income taxpayers in high property tax states.
The average amount of real estate taxes claimed in 2015 was about $5,000, well below the proposed $10,000 cap. However, the average amount claimed for taxpayers with incomes above $200,000 was $10,250. The average property tax deduction for this income group was almost $17,000 in New York and over $14,000 in Connecticut and even in red states such as Florida and Texas, high-income itemizers claimed an average of about $13,000. Thus, some higher-income taxpayers would be unable to claim a deduction for the full amount of property taxes paid.
The property tax deduction would become irrelevant for most taxpayers
TPC estimates that about 36 million taxpayers will benefit from the property tax deduction in 2017. Because the TCJA would substantially raise the standard deduction and eliminate other deductions, the number of itemizers will drop substantially, possibly by as much as 75 percent. The remaining taxpayers claiming the property tax deduction will become even more skewed to the very top of the income distribution, even if the deduction is capped at $10,000.
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